We’ve started working with a new lender that has a niche 5 to 7-Year Residential 1-4 Unit Rental Property Loan program intended for the investor borrower who cannot quite qualify for a conventional loan but is stronger and warrants better loan pricing than traditional hard money offers.
There could be several reasons that a borrower wouldn’t qualify for conventional financing (Fannie Mae/Freddie Mac), including:
- More than 4-6 properties financed, including primary residence
- Not declaring a high enough Adjusted Gross Income (AGI) on personal income taxes to meet the Debt-To-Income (DTI) ratios conventional lenders require
- Irregular year-over-year (YOY) income or Declining Income
- The borrower is a real estate investor who flips properties and has a large rental property portfolio
- The borrower has been self-employed for less than two years
- Plus, many other reasons that we’ve frequently seen over the last five years
This new 5 to 7-year rental property loan program is pretty attractive for the conventional loan fallout borrower, who back in 2004-2007, would be considered an “Alt-A” borrower. “Alt-A” meant that the borrower didn’t qualify for “A-Paper” (Fannie Mae / Freddie Mac) for the reasons mentioned above yet were a notch above “B/C-Paper” (Subprime), which today doesn’t exist, but has been serviced by private money and hard money lender ever since 2009.
The new 5 to 7-year program is what we used to call a “Stated Income, Verified Asset” loan. Instead of using a Adjusted Gross Income from personal income tax filings, as conventional lenders require, this particular lender uses rental income from the subject property and verifies the borrower’s liquid assets, requiring a minimum of four months reserves.
Below are the documentation requirements:
- Rental Agreement(s)
- Rent Rolls
- Verification of Rental Income Deposits – cancelled checks, deposit slips
- Verification of Liquid Assets (4 mos of Principal, Interest, Taxes, and Insurance [+ HOA if applicable])
- Full Interior / Exterior Appraisal
Pricing starts out in the mid-6.00% range, with current floor rate coming in at 6.25% on the 5-Year product and 6.375% on the 7-Year. However, there are additional increases to the interest rate for things like loan amount, interest-only payment option, FICO scores, buying out year(s) of the standard 3-year prepayment penalty, and Loan-To-Value (LTV) – the higher the LTV the higher the interest rate.
We recently submitted a Rate & Term Refinance for a 7-year fixed rate loan in Washington on a duplex with $2,300/mo rental income that was approved at the following terms:
- $230,000 Loan Amount
- 6.99% Fixed Rate for Seven Years
- $1,339/mo Interest-Only (I/O) payment
- 2-Year Prepayment Penalty (bought out Year 3 of the PPP)
- Appraisal Required
- Closing Costs: 2.25 Points + $1340 Underwriting
We see this program as being an excellent fit for the active real estate investor who is pretty strong on paper with significant equity in their properties and excellent rental cash flows but falls just outside the Fannie Mae and Freddie Mac guidelines for one reason or another. This loan will be a good fit for that borrower looking to lock in longer-term financing at attractive interest rates.